District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20)

In United States v. Bittner 2020 U.S. Dist. LEXIS 113416 (E.D. Tex. 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (Federal Tax Crimes Blog 4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

U.S. Brings Summons Enforcement Suit against Del. Dept of Insurance re Micro-Captives (6/23/20)

DOJ Tax has brought a summons enforcement suit against the Delaware Department of Insurance (“DDOI”) to obtain documents and testimony that DDOI has failed to provide regarding microcaptive insurance companies.  United States v. Delaware Department of Insurance (D. Del. Dkt. 1:20-cv-00829).  The petition and IRS agent declaration are available on CourtListener here and here.  The CourtListener docket entries are here.

Excerpts from the complaint (cleaned up):

4. The Internal Revenue Service issued a summons to the DDOI for testimony and certain records relating to filings by and/or communications  ith Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC  “Tribeca”) or others working with Artex and/or Tribecca. With this petition, the United States seeks an order enforcing Request 1 of the [*2] summons to the extent the DDOI has not already provided those records to the Internal Revenue Service, and also requiring the DDOI provide the summonsed testimony to the IRS. 

5. The Internal Revenue Service is conducting an investigation for the purpose of determining the role of Artex in  transactions involving micro-captive insurance plans organized under 26 U.S.C. § 831(b), as well as other potentially  abusive transactions. Tribeca is fully owned by Artex as of 2010, and the IRS is also investigating its role in transactions involving micro-captive insurance plans and other potentially abusive transactions. Among other things, the Internal Revenue is looking at whether Artex or Tribeca have promoted micro-captive insurance schemes and whether their actions may result in penalties pursuant to 26 U.S.C. § 6700, which Congress designed as penalty provisions specifically directed towards promoters of abusive tax shelters and other abusive tax avoidance schemes.  * * * see also Keltner Decl. ¶ 4 (investigation to determine whether Artex and Tribeca are subject to penalties under 26 U.S.C. § 6700, which permits imposition of penalty against any person who makes or furnishes or causes another person to make or furnish certain statements which the person knows or has reason to know are false or fraudulent as to any material matter). 

6. Micro-captive insurance schemes were designated a “Transaction of Interest” by the IRS. Transactions of Interest are those the IRS believes have the potential for tax avoidance or evasion. The United States Tax Court has found these schemes can be used to avoid or evade taxes. In the last three years, the United States Tax Court has struck down three separate micro-captive insurance transactions where the taxpayer sought to shield income from taxation through sham insurance companies [*3] Avrahami v. Commissioner, 149 T.C. 144, 179-180 (Tax Ct. 2017) (describing micro-captive transactions); Reserve Mech. Corp. v. Commissioner,  Tax Ct. Memo. 2018-86, 2018 WL 3046596, at *16 (Tax Ct. 2018) (finding transactions did not constitute insurance where they involved circular flow of funds, were not the product of arm’s-length considerations, used premiums that were not actuarially determined, covered nonexistent risks, and involved unlicensed insurance companies created for no legitimate non-tax purposes) (appeal docketed at No. 18-9011 (10th Cir.)); Syzygy v. Commissioner, T.C. Memo. 2019-34, 2019 WL 1559540, at *45 (Tax Ct. 2019) (invalidating Delaware micro-captive insurance company because arrangement did not distribute risk and did not meet commonly accepted definition of insurance). In at least one case,  the United States Tax Court noted the participation of promoters in the micro-captive insurance scheme it invalidated. Avrahami v. Commissioner, 149 T.C. at 206 (taxpayers cannot rely on “promoters” of tax avoidance schemes to avoid  penalties under 26 U.S.C. § 6662).

* * * *

8. The DDOI has issued approximately 191 insurance certificates of authority to micro-captive insurance companies associated with Artex. The informationsought by the IRS summons is likely to be relevant to a determination of whether the Artex or Tribeca transactions were abusive tax shelters and whether Artex or Tribeca made false and fraudulent statements in organizing those abusive tax shelters.   

Swiss Financial Institution Clients May Have Claims for Hidden Fees (6/12/20)

I picked up this article, reporting that investors may have some relief for Swiss financial institutions receipt of hidden undisclosed fees related to their investment of client funds.  Leon Harris, How to turn the tables on the Swiss banks – opinion (Jerusalem Post 6/11/20), here.  According to the article, bribery and kickbacks are normally illegal, but Swiss financial institutions for many years took so-called “retrocession fees” or “portfolio maintenance commissions” from funds or other investment vehicles that reduced the yield to the financial institutions' customers without disclosure to the customers.  The example is:

Annual return, say: 5%
Undisclosed “Portfolio maintenance commission”: 2%
Disclosed return to the investor: 3%
Disclosed bank fee: 1%
Net disclosed return: 2% (less than half the 5%)
In other words, the bank or financial institution may have received not only a disclosed fee appearing on your bank statement, but also a hidden fee from the fund or similar where they invested your money.

The article reports

This lucrative business model helped the Swiss banks to enjoy billions of dollars of retrocession fees that are due to the investors and can therefore be claimed back. According to a study, around $4 billion  of retrocessions were apparently collected by the banking institutions in 2012 alone.

The article says that, pursuant to Swiss Federal Court decisions, clients of the banks suffering the economic cost of these hidden fees may have a remedy.  The process, as described, is:

Extradited E&Y Tax Shelter Enabler Sentenced (6/9/20/ 6/10/20)

I have often posted on the Government’s criminal prosecution of persons promoting abusive tax shelters.  There were a number of prosecutions starting around 2005 as the Government focused on major accounting firms, law firms and financial firms and the persons involved with them.  One set of the prosecutions related to principals at Ernst & Young, the accounting giant.  I blogged on a major Second Circuit decision in the prosecutions and included further links to the blogs on the E&Y prosecutions.  Major CA2 Decision on E&Y Tax Shelter Convictions (Federal Tax Crimes Blog 11/29/12), here; see also E&Y Admits Wrongdoing on Bullshit Tax Shelters; Will Pay $123 Million (Federal Tax Crimes Blog 3/1/13), here.

One of the E&Y defendants in the prosecution, David Smith, reached a plea agreement but left the country before he could be sentenced and serve whatever time would be imposed.  After fighting extradition for years, Smith, an attorney and one of the major facilitators at E&Y, was extradited and sentenced yesterday to three years in prison, the maximum that he could be sentenced under his plea agreement.  The Bloomberg news report is here:  Chris Dolmetsch, Lawyer Who Ran From Ernst & Young Tax Shelter Case Gets 3 Years (Bloomberg News Wire 6/8/20), here. 

According to the article, Smith requested that “he be sentenced to the 11 months he’d already served in New York’s Metropolitan Correctional Center,” after extradition.  Apparently, he also cooperated earlier during the initial investigation phase and reached the plea agreement before he fled the country, so that would be a positive factor for him.  And, in mitigation, Smith claimed that he did not go on the lam to avoid incarceration, but because of the 9/11 events; moreover, he claimed, "he feared prosecutors would renege on promises of leniency after he fully cooperated with their investigation."  The judge imposed the harshest sentence he could under the plea agreement.  I gather that the judge did not buy Smith's claims.  

It is a good thing that his attorneys negotiated a plea with a maximum possible sentence of three years.  The plea was to tax perjury, § 7206(2).  Attached here is a copy of the judgment on CourtListener.  The plea agreement was quite very favorable for Smith given his apparent role in the overall scheme.

Note the last paragraph was revised 6/10/20 12:00pm to reflect that the plea agreement was to § 7206(1), tax perjury, rather than § 7212(a), tax perjury, as I had speculated in the original version.  Either way, the incarceration period is limited to three years.  And, the major point was that the plea was a sweet deal given his apparent role.  Of course his time being held from the date of extradition to the sentencing does not count toward the sentence, but that period is really attributable to the fact that he fled the country rather than punishment for the underlying crime.

District Court Denies Gov't Summary Judgment in FBAR Collection Suit (6/4/20)

In United States v. de Forrest (D. Nev. Dkt. # 2:17-cv-03048 Dkt entry 52, Order dated 5/31/20), here (with docket entries here), the court denied the Government’s motion for summary judgment in an FBAR willful penalty collection suit.  I don’t think the Order offers anything material to the discussion of FBAR willful penalty matters, except that, on the facts recounted, I speculate that other judges might have granted the Government’s motion.  And, on the facts recounted, if this judge were the “fact decider” (she is not because de Forrest demanded a jury), I am not sure de Forrest would prevail because the facts do not look particularly good.  I did note that the court says (Slip Op. at 3):  “Defendant asserts that over the course of their relationship, Mr. de Forrest [the money guy who started the offshore accounts] warned Defendant 'not to say anything about anything' regarding the the Swiss accounts. (Def. Dep. 42:22–43:1).2,” with the footnote saying:  “n2 In her Response, Defendant asserts that her husband threatened to murder her if she told anyone about the accounts. (Resp. at 2). However, there is no citation supporting this claim.”

The Defendant in the case demanded a jury.  I have previously discussed a jury trial in FBAR refund and collection suits in Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18), here.  I wonder which party a jury might favor as compared to a judge (this judge in particular).  The Government did not demand a jury on the original complaint.  There is no explanation for why the Government did not demand a jury, but it may have been simply because bench trials are easier and more expeditious than jury trials.  (At the margins, some judges might prefer to punt the fact issue to a jury rather than actually deciding the issue on motion for summary judgment.)  I do know that, from my experience in refund litigation with DOJ Tax, my attention was heightened when I got a refund suit with no jury demand by the taxpayer and I would sometimes demand a jury if there were some reason to believe that a jury would be more favorable to the Government.  Where I litigated, in the deep South in the mid-1970s,  the general understanding was that, except in some types of cases, a jury would not be more favorable – indeed likely to have at least one juror hostile -- to the Government (have war stories there, but won’t digress here).  Most tax litigators in the South knew that and would almost routinely demand a jury in a tax refund suit, so when the taxpayers did not demand a jury, that was worthy of attention.

IRS Solicitation for Outside Expertise in CryptoCurrency Audits (5/31/20)

There are reports that the IRS has sent out a “Statement of Work” soliciting assisting from contractors to help with audits involving potential cryptocurrency transactions.  See Guinevere Morre, Got Cryptocurrency? Get Ready For An IRS Audi (Forbest Editors’ Pick 5/29/20), here; and IRS Soliciting Contractors to Help Audit Crypto Tax Returns (CryptoTrader.tax blog), here(with a copy of the Statement of Work).

The introduction says:

The Internal Revenue Service (IRS) requires consulting services to support a taxpayer examination involving virtual currency. In particular, the IRS requires consulting services to calculate taxpayers' gains or losses as a result of their transactions involving virtual currency. Specific requirements are outlined below.

 The Statement of Work process is described here.

The use and trading in cryptocurrency offers great opportunity for tax avoidance and evasion, so it is not surprising that, given the IRS cryptocurrency push, it would seek outside expertise to assist.

Revised IRS Form 14457 for Voluntary Disclosure Preclearance (5/29/20; 7/17/20)

In April 2020, the IRS revised its preclearance form for voluntary disclosure – Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here.  I have not compared the new form with the old, so cannot point out the differences.  I do note that the instructions (beginning on p. 6 of the 14 page form) has a Section titled “What’s New” which I found unhelpful.  Basically all it says is that “The Service revised and retitled Form 14457.”  In broad overview, it seems that it has the same two-stage process as the prior form, but there may be some disclosure items in the two-stage process that changed.  I presume also that the instructions may have changed to address some issues that have come up in the processing of voluntary disclosures under the old form.

Joel Crouch, here, of Meadows Collier has a discussion, titled Update on IRS Voluntary Disclosures on the firm’s blog here.

Added 7/17/20 1:15am:

On July 14, 2020, the ABA Tax Section Civil and Criminal Penalties Committee held a virtual meeting in lieu of the in-person meeting at the annual May Meeting.  One of the issues discussed was the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the IRS practice with respect to the Form.  Here are some bullet points that I summarize from the meeting with, in some cases, exact quotes as best I could reconstruct them using the contemporaneous computer generated transcription (I think audio of the meeting is available from the ABA):

• The IRS participants providing the information in the bullet points here were:  Carolyn A. Schenck, National Fraud Counsel and Assistant Division Counsel (International), SB/SE, Office of Chief Counsel, IRS, and D. Richard (Rick) Goss, Acting Director, International Operations, Criminal Investigation, IRS.  I won’t separately identify which of those two made the comments I bullet point here.
• The related slide states the key requirements of the program:  (i) only legal source income qualifies; (ii) the disclosure must be timely, meaning that the IRS has not commenced civil examination or criminal investigation, received information from a third party, or acquired information of noncompliance from a criminal enforcement action (i.e., search warrant, grand jury subpoena, etc.); and (iii) must be truth and complete and with taxpayer cooperation with the IRS in the process by identifying all enablers, submitted returns and reports and making good faith arrangements to pay.
• Voluntary disclosure and the benefits the program offers requires the submission of the Form for pre-clearance.  No Form and pre-clearance, no voluntary disclosure.  Quiet disclosures do not work.
• The voluntary disclosure program is only for the client who has criminal exposure.  “So this is not for a negligent client.  This is not for someone who doesn't have any indicators of fraud.  No criminal exposure, this is not the practice for them.”
• The program has a requirement for a civil fraud penalty for the year with the highest tax liability.  In some limited cases, the civil fraud penalty may not be asserted, but that will be rare.  “It will be unusual for a case to come out without an application of a civil fraud penalty.”
• Apparently new Form 14457 instructions will be forthcoming with more information so “stay tuned.”  No timing for such additional instructions was given.
• Multiple disclosures may be made on a single Form.  If two spouses file a single form, “make sure you clearly delineate which facts relate to which spouse.  If there's one spouse with willful conduct and one without, just make sure that's clearly delineated.”
• For Part I Section 7, all entities must be listed.  Omissions may result in disqualification for voluntary disclosure.

District Court Rejects Defendant's Creative Claim that Alleged Overpayments of Other Taxes Precludes Criminal Liability (5/28/20)

In United States v. Hamdan (E.D. La. Dkt. 19-60 Order Dated 5/22/20), here, the Court denied the defendants’ motion to dismiss most of the counts in their 74-count Superseding Indictment charging (i) the conspiracy by “evading paying federal income and employment taxes” (not clear whether an offense conspiracy or defraud/Klein conspiracy charge or both, but not important for this discussion) by underreporting wages, (ii) failure to account for and pay certain trust fund taxes (§ 7202), and aiding and assisting the preparation of false individual income tax returns for third parties (§ 7206(2)).  The defendants owned food marts through which the alleged crimes were committed.

In their motion, the defendants (principally Hamdan) argued (high level summary) that:  (i) Hamdan overpaid his personal income taxes in an amount exceeding the alleged employment and income taxes charged in the indictment which should have been offset against those taxes and that the alleged overpayment negated willfulness; (ii) Hamdan’s right to a credit for the alleged overpayment of tax should estop the Government from charging because the offset mechanism somehow assures taxpayers that overpayments of one tax liability will exonerate taxpayers from criminal liability related to other internal revenue tax; and (iii) that the Government has been unjustly enriched by the alleged overpayments.

The Court did not accept any of those claims, finding that the Superseding Indictment properly alleged the offenses charged.  The Court did not accept Hamdan’s key factual claim that he had overpaid his income taxes or that, even if he had, he had properly claimed the refund so that the refund would be available to offset.  Right now, I don’t see an easy path to providing a meaningful analysis of the Court’s rejection of the defendants’ diversions (creative and unusual as they were).  I just commend the opinion to readers who might find some such interesting.

Confusion as to Sentencing Guidelines Tax Loss and Civil Tax Loss Requires Remand and Resentencing (5/21/20)

In United States v. Brannum (9th Cir. Unpublished 5/12/20), here, the Ninth Circuit reversed and remanded a case because of the prosecutor’s violation of the plea agreement as to the amount of the tax loss.  Readers will recall that, in the Sentencing Guidelines’ calculation of the offense level and sentencing range, the principal component in tax crimes cases is often the tax loss.  The plea agreement stipulated a tax loss of $101,554.01.  The PSR incorporated this number and recommended a below-guidelines sentence of probation and home confinement.  In its sentencing memorandum, however, the Government urged that the actual loss was approximately $3.3 million, and sought a sentence of 21 months.  Brannum objected.  The sentencing court said it would not consider the higher number in sentencing and then sentenced Brannum to a year and a day (a standard sentence to get the benefit  of good time credit).

The Ninth Circuit reversed and remanded for resentencing, holding that the Government’s assertion of higher tax loss than stipulated in the plea agreement violated the terms of the plea agreement.  The Court felt that remand and resentencing before a different judge was required because, in a sense, although the sentencing judge said he did not consider the higher number, it is hard to “unring the bell” so to speak.

 JAT Comments:

1. The Government’s excuse for citing the higher number was:  “that the stipulation about 'total tax loss' referred only to so-called ‘criminal’ losses for Guidelines purposes, not the actual total ‘civil’ loss of tax revenue, which the government contends could be used in applying the 18 U.S.C. § 3553(a) factors.”  If that indeed was the Government’s attempted justification, the justification was patently wrong.  Sentencing is based on the criminal tax numbers.  The civil tax numbers may and often do exceed the criminal tax numbers.  (Accordingly, after sentencing, it common for the IRS to assert a higher civil tax amount.)  But sentencing in a criminal proceeding can only consider loss related to the criminal tax conduct.  But neither § 3553(a) nor the Sentencing Guidelines suggest or hint that civil matters should be considered in sentencing.  

2. Thanks for the lead to the case from Evan J. Davis, 9th Circuit Confirms Plea Agreements Are Worth the Paper They’re Printed On (Tax Litigator Blog 5/21/20), here.  Readers will find the Tax Litigator Blog a useful resource for tax crimes and tax litigation generally.

Court Re-Calculates Willful Penalties Found to Be Arbitrary (5/18/20; 8/28/20)

In United States v. Schwarzbaum (S.D. Fla. Dkt 18-cv-81147 Order Dtd 5/18/20), here, following through on its earlier opinion holding the calculation of willful FBAR penalties to be arbitrary and capricious, the Court recalculated the willful FBAR penalties.  The recalculation resulted in a reduction of the willful penalty for 2007-2009 from $13,729,591.00 to $12,907,952.00, resulting in a $891,639 reduction in FBAR and, presumably, commensurately reduced penalties and interest.  I previously wrote on the earlier opinion.  District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/21/20; 3/24/20), here.  I also wrote on a later case that relied on that earlier opinion in Schwarzbaum.  District Court Denies Summary Judgment on Willfulness But Finds Penalty Allocation Arbitrary and Capricious (Federal Tax Crimes Blog 5/15/20), here.

For the current order I make the following comments:

1.  According to the opinion (Slip Op. 6), the Government’s original “mitigated willful FBAR” penalty calculation amount was $35,729,591.  For that proposition, the Court cites its earlier order which offers no explanation.  Perhaps there is an explanation in the documents the Court earlier relied upon, but I have not traced that down because it is not necessary for analysis here.  I do note that, however, that extraploating from the numbers stated in the opinion, it is not at all clear to me how that original number of $35,729,591 could be reached.  The IRM process is to take 50% of the aggregate high amount for the highest year (which I presume eliminated duplications in the year for intra account transfers) which would mean that the aggregate high amount for highest year (which then included 2006-2009) would have been $74,479,182.  From the June 30 numbers offered in the opinion, it is hard to extrapolate that high a number during the respective years.  (Note that my presumption might not be correct that duplications were eliminated and that could explain why the IRS realized that the indicated high values produced an inappropriate FBAR amount; in addition, to the extent that the indicated amounts allocated to the years produced an amount in any given year in excess of the capped penalty of 50% of the amounts on the respective June 30, there would have to be an adjustment as well.)

2.  As I noted in the second blog entry above, if the calculation had been pursuant to the IRM, the IRS’s calculation should have produced an FBAR penalty in each year that was not in excess of the maximum 50% of account values on the respective June 30 reporting date.  So, it is not clear to me on the face of the opinion exactly what the differences between the Court’s calculations and the IRS’s mitigated calculations.  Perhaps it could be because the Court refused to base its calculations on estimated June 30 amounts for some accounts which the Government asked it to do.  Perhaps if those estimated accounts were used, the formula could have produced the $13,729,591.00.  But, by declining to use estimated values, thus limiting the penalty to $100,000 for accounts with higher estimates, the difference may be explained.  Perhaps someone who digs into the details of the case could offer an explanation that I could post here.

Article on Renewed Focus on Criminal Tax Enforcement (5/17/20)

Readers of this blog might be interested in the following article by a prominent tax crimes practitioner:  Scott Michel, INSIGHT: The IRS’s Renewed Focus on Fraud—Implications for Tax Practitioners (Bloomberg Tax 5/8/20), here.

Here’s a teaser from the opening:

The IRS’s fraud enforcement pendulum may be swinging back toward more enforcement after a decade of administrative difficulties for the agency. Scott Michel of Caplin & Drysdale identifies indicia of increased fraud enforcement and discusses the implications for tax practitioners. 

Tax practitioners often analogize tax enforcement to a pendulum, slowly swinging back and forth between greater and lesser IRS civil examination and criminal investigation activity. For example, in the mid-2000s, the IRS was recovering from the congressional bashing of the late 1990s, which lowered audit, enforcement, and collection activity, and it then embarked on a major enforcement push against marketed and structured tax shelter transactions. The IRS and the Department of Justice moved aggressively on multiple tracks at once, pursuing criminal indictments, civil promoter penalty examinations, and other initiatives. 

In 2007 two top private practitioners reacted to these developments in an article entitled “IRS Enforcement: The Pendulum Has Swung Too Far,” warning that these action could become an “institutionalized way of doing business,” possibly leading to “a state of permanent war” between the IRS and tax professionals. (K. Keneally and C. Rettig, Journal of Tax Practice and Procedure, Apr./May 2007. Ms. Keneally and Mr. Rettig later took hold of the pendulum themselves, the former as Assistant Attorney General for the DOJ Tax Division from 2012-2014, and the latter as current IRS Commissioner.) 

Ultimately, however, events overtook their concern. Over the past decade the IRS has faced substantial budget shortfalls, political headwinds, and massive workforce attrition, with the result that except in selected areas, such as unreported foreign accounts and assets, enforcement has waned, and audits, fraud referrals, and criminal investigations have reached historic lows. 

Before the onset of the Covid-19 pandemic, the IRS took a number of steps to swing the pendulum back toward more fraud enforcement. Once the IRS and the rest of us are beyond the extraordinary adjustments underway now to our tax administration system and our lives, these actions will begin to take hold. This article will consider these increasingly clear signals from the IRS that when that happens, investigating and punishing fraud will again be a growing focus for the IRS, with important implications for tax practitioners advising clients in audit and collection matters.

District Court Denies Summary Judgment on Willfulness But Finds Penalty Allocation Arbitrary and Capricious (5/15/20)

In Jones v. United States (C.D. Cal. Dkt. 19-04950 Order Dated 5/11/20), CourtListener here, the Court held that, whether or not the plaintiff (Mrs. Jones) acted willfully was a question of fact and denied motions for summary judgment accordingly.  (Slip Op. 9-14; 16-19.) Further, the Court held that the willful penalty assessments were within the statutory maximum for each year. (Slip Op. 19-20.)  Finally, the Court held that the method whereby the IRS determined and allocated the willful penalty was arbitrary and capricious. (Slip Op. 14-16.)

For the latter arbitrary and capricious holding, the Court relied on the Schwarzbaum district court case that I discussed here.  District Court Muddles an FBAR Willful Penalty Case (3/21/20; 3/24/20), here.  I just refer readers to that discussion.  But I thought it might be helpful to illustrate the IRS's method for allocating the single 50% high year high balance penalty amount among the years that the person is liable for the willful penalty

The method the IRS uses is as follows:

4.26.16.6.5.3 (11-06-2015)
Penalty for Willful FBAR Violations - Calculation 

(1) For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful. 

(2) After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.

For example, if you assume the following facts, the allocation among the years where the willful penalty otherwise applies is:

Year	High Balance	Balance June 30 Foll Yr	Max Poss Pen	IRM Allocation
1	$1,000,000	$1,100,000	$550,000	$194,444
2	$1,200,000	$1,250,000	$625,000	$233,333
3	$1,400,000	$1,450,000	$725,000	$272,222
			$1,900,000	$700,000
IRM Penalty Max (50% of high year highest balance)				$700,000

With different numbers, the allocated amount for a particular year might exceed the maximum allowed based on the June 30 balance.  (Those wanting an Excel spreadsheet to play around with the numbers may use mine, here; I do provide an extra column in the spreadsheet to calculate the cap based on June 30 amounts; please let me know if there are any busts in the calculations,for I am not a spreadsheet guru.)

More on Defraud Conspiracy as Requiring Object to Obtain Money or Property (5/11/20)

On 5/11/20 at 10:00 pm EDT, I revised this post, where appropriate, to use conspiracy lingo -- object rather than intent.  I have made some other, principally editorial changes, as well (principally adding a new JAT Comment #2 and moving the later comments up one number).

I recently posted on the Supreme Court’s opinion in Kelly v. United States, 590 U.S. ___, ___ S.Ct. ___ (5/7/20), here, and potential implications for the defraud/Klein conspiracy.  Supreme Court Reverses Bridgegate Convictions, Holding that Fraud Means Fraud; Implications for Defraud/Klein Conspiracy? (Federal Tax Crimes Blog 5/7/20), here.  Briefly, my concern  expressed in that blog and previously expressed (perhaps ad nauseum) was that the term defraud in the defraud/Klein conspiracy under the conspiracy statute, 18 USC § 371, is interpreted to permit conviction in the absence of an object to commit fraud (meaning obtaining something of value by fraudulent means).  I discuss that anomaly in the criminal law in the blog and in substantially more detail in the article I link in the blog.  Today, I want to follow through that discussion with an arguably related consideration from a nontax case earlier this year.

In United States v. Miller, 953 F.3d 1095 (9th Cir. 2020), here.  To start the discussion, I offer this from the summary preceding the opinion (the footnote indicates that the summary is prepared by the staff and not part of the opinion, but I think it useful for purposes of this blog; bold-face supplied by JAT):

Overruling prior decisions of this court in light of the Supreme Court's intervening decision in Shaw v. United States, 137 S. Ct. 462, 196 L. Ed. 2d 372 (2016), the panel held that wire fraud under 18 U.S.C. § 1343 requires the intent to deceive and cheat — in other words, to deprive the victim of money or property by means of deception — and that the jury charge instructing that wire fraud requires the intent to "deceive or cheat" was therefore erroneous. The panel nevertheless held that the erroneous instruction was harmless.

The wire fraud statute in relevant part (18 USC § 1343) describes the person criminally liable:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire [etc.]”

As written, the use of "or" seems to be disjunctive but, if the word defraud is interpreted to require an intent to obtain money or property by fraud, the two seem to be parallel (perhaps one or the other redundant).

The issue then was further set up (p. 1100):

At trial, Miller requested a jury instruction stating that, to be guilty of wire fraud, he must have intended to "deceive and cheat" MWRC. The trial court, however, delivered the Ninth Circuit's model jury instruction, which states that wire fraud instead requires only the intent to "deceive or cheat" (emphasis supplied) the victim. As his first issue on this appeal, Miller argues that this jury instruction misstated the law.

The Ninth Circuit (per the opinion drafted by USDJ Jed S. Rakoff (SDNY) sitting by designation, see comment #4 below) states in pertinent part (pp. 1101-1103, footnotes omitted):

U.S. Taxpayer Renouncing U.S. Citizenship Indicted And Extradition Started (5/11/20)

A reader just alerted me that I had overlooked a significant item of interest to readers of this blog. On March 5, 2020,, DOJ issued the following press release:  Founder of Russian Bank Charged with Tax Fraud: Allegedly Concealed $1 Billion in Assets and Income when Renouncing U.S. Citizenship, here.

Key excerpts from the release are:

According to the indictment, Oleg Tinkov was the indirect majority shareholder of a branchless online bank that provided its customers with financial and bank services.  The indictment alleges as a result of an initial public offering (IPO) on the London Stock Exchange in 2013, Tinkov beneficially owned more than $1 billion worth of the bank’s shares.  The indictment further alleges that three days after the IPO, Tinkov renounced his U.S. citizenship – a taxable event requiring Tinkov to report to the IRS the constructive sale of his worldwide assets, report the gain on the constructive sale of those assets to the IRS, and pay tax on such gain to the IRS.  Although Tinkov allegedly beneficially owned more than $1 billion of TCS shares at the time of his expatriation through a British Virgin Island structure, the indictment charges that Tinkov filed a false 2013 tax return with the IRS that reported income of less than $206,000, and a false 2013 Initial and Annual Expatriation Statement reporting that his net worth was $300,000.

If convicted, Tinkov faces a maximum sentence of three years in prison on each count.  He also faces a period of supervised release, restitution, and monetary penalties.

The indictment, here, charges two counts of tax perjury, § 7206(1), so the maximum incarceration period on the charges are six years.  The Government could always get a grand jury to issue a superseding indictment with more charges (e.g., FBAR counts or evasion counts, which are suggested by the discussion above).  It is reported that Tinkov has acute leukemia so (see e.g., Moscow Times article here), regardless of the number of accounts, I doubt that any period of incarceration would exceed 6 years.

Also, Tinkov apparently spent a lot of time outside the U.S., so during that period the statute of limitations was suspended (or not counted) toward the six-year statute otherwise allowed for the charges offenses.  § 6531(5) and flush language.

The CourtListener docket entries are here.

Supreme Court Reverses Bridgegate Convictions, Holding that Fraud Means Fraud; Implications for Defraud/Klein Conspiracy? (5/7/20)

In Kelly v. United States, 590 U.S. ___, ___ S.Ct. ___ (5/7/20), here, the court reversed the infamous Bridgegate convictions for “wire fraud, fraud on a federally funded program or entity (the Port Authority), and conspiracy to commit each of those crimes.”  The Court held that “Because the scheme here did not aim to obtain money or property, Baroni and Kelly could not have violated the federal-program fraud or wire fraud laws.” (From the Syllabus.)

This is perhaps not a remarkable holding (although I do remark below).  It was unanimous.  Moreover, federal crimes where fraud is an element of the crime have typically required an object to obtain money or property.  So, I think the holding is consistent with that line of cases, and the unanimous Court in Kelly so holds.

But, as I have noted elsewhere fraud or its parallel defraud in the federal criminal statutes, while normally requiring an object to obtain money or property, does not, as interpreted, so require for the defraud conspiracy, 18 U.S.C. § 371.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here.  Readers of this blog will know that § 371 defines two crimes – an object conspiracy and a defraud conspiracy.  The object conspiracy requires that the object of the conspiracy be the commission of a crime otherwise described in the law.  (The conspiracies charged in Kelly were object conspiracies, see Slip Op. 7 n. 1 and the case below styled United States v. Baroni, 909 F.3d 550, 556 (3rd Cir. 2018).)  Thus, for example, an object to commit tax evasion is an object conspiracy.

The defraud conspiracy, as interpreted, is more amorphous. The text of of § 371 for the defraud conspiracy is: “If two or more persons conspire * * * to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy * * *.”  Defraud normally is a verb form for fraud (a noun), particularly with respect to the focus to obtain money or property.  For example, the Merriam Webster online dictionary, here, defines “defraud” as (with examples):

transitive verb
: to deprive of something by deception or fraud
// trying to defraud the public
// Investors in the scheme were defrauded of their life savings.

And the synonyms are:

beat, bilk, bleed, cheat, chisel, chouse, con, cozen, diddle, do, do in, euchre, fiddle, fleece, flimflam, gaff, gyp, hose [slang], hustle, mulct, nobble [British slang], pluck, ream, rip off, rook, screw, shake down, short, shortchange, skin, skunk, squeeze, stick, stiff, sting, sucker, swindle, thimblerig, victimize

And the relevant definition of fraud (a noun), here, is:

1a: DECEIT, TRICKERY
specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right
// was accused of credit card fraud
b: an act of deceiving or misrepresenting : TRICK
// automobile insurance frauds

Fraud and defraud thus have similar connotations with respect to the issue addressed in Kelly–an object to obtain money or property.

A Thought on The Confluence of Incarceration and Coronavirus (5/7/20)

I recently posted on the tip of the iceberg of motions from persons incarcerated in federal prisons based on the risks from the coronavirus pandemic.  Compassionate Release from Incarceration Based on COVID-19 Pandemic (Federal Tax Crimes Blog 4/20/20; 5/7/20), here.  I particularly focused on the types of incarcerated persons which I feature in this blog -- persons convicted of tax or related crimes (or sometimes the broader category of white collar crime).  (Today, I added to that earlier blog a reference and link to Peter's Reilly excellent offering from yesterday, Judge Urges Prison Furlough For Author Of “Biggest Tax Fraud Ever” (Forbes 5/6/20), here; highly recommended.)

I have been watching a recent case, United States v. Pursley (S.D. Tex. No. H-18-575) (Courtlistener docket entries here).  I have written on that case in a couple of blogs that I link at the end of this blog entry.  For present purposes, the key information is that, in September 2019, Pursley, a lawyer, was convicted of tax crimes.  The judge denied the Government's motion to remand Pursley to custody.  There were standard post-trial motions (e.g., new trial and acquittal) which were denied.  Sentencing was originally set for December 2019.  Sentencing has been postponed and rescheduled several times and is currently scheduled for July 27, 2020.

In order to set up the anomaly I offer today, I will assume that Pursley is sentenced to 5 years incarceration.  While he is awaiting sentencing in July 2019, he presumably has been in self-isolation at least to some degree because of the pandemic.  That period of self-isolation, which has some characteristics of incarceration, will not count towards his sentence.

However, if he had been sentenced before the pandemic (say before February 2020), he might have had a shot for compassionate release or furlough if his personal characteristics and conditions of incarceration supported release or furlough.  Since, for the reasons noted by Judge Pauley in the Daugerdas case (see my blog entry above and Peter Reilly's blog entry), it is not likely that he would get compassionate release, he might get a furlough which might at least mean that he could serve some of his incarceration period in a type of home confinement (somewhat analogous to pandemic self-isolation) which, I would think, beats prison.

Court Denies Motion to Dismiss FBAR Collection Suit (4/30/20)

In United States v. Green (S.D. Fla. Dkt. 1:19-cv-24026-KMM, Order dated 4/27/20), CourtListener here, the Court denied a motion to dismiss, holding (i) that the FBAR willful penalty survived the death of the person penalized and (ii) that the Government’s complaint adequately alleged willfulness.  These are, by now, standard holdings, so I do not discuss them.

I do note the following interesting fact (Slip Op. p. 6-7.):

On October 31, 2013, Marie applied to enroll in the IRS’s 2012 Offshore Voluntary Disclosure Program (“OVDP”), which offered a coordinated, standardized settlement to U.S. taxpayers who had failed to report foreign bank accounts by filing FBARs and failed to pay income tax on income received in those foreign bank accounts. Id. ¶ 49. After Marie enrolling into the 2012 OVDP, she attempted to “directly enter” another offshore disclosure program offered by the IRS. Id. ¶ 51. After Marie was informed that she was not allowed to directly enter the other program, she informed the IRS that she intended to withdraw from the 2012 OVDP and the IRS removed her from the program. Id. ¶¶ 51, 52. On June 1, 2017, a duly authorized delegate of the Secretary assessed civil penalties against Marie for willfully failing to file FBARs for 2010 as to the BoJ and Templaide Accounts, and 2011 [*7] as to the BOJ account. Id. ¶ 60. 

Are Discussions with Lawyer Colleagues Waivers of the Work Product Privilege? (4/30/20)

Today, I discuss a facet of the work-product doctrine, often called the work product privilege.  I address waiver for opinion work product in the setting for discussions among lawyers (or others for whom the privilege might apply) who have not been retained in the engagement to develop and refine legal issues and theories.

The specific context that this came up was for a legal email discussion group maintain by an attorney organization to discuss particular tax contexts and issues.  The discussion group contains a large number of lawyers (I think it is limited to lawyers), and so far as I am aware, the list of lawyers (as it may change from time to time) is not made available to the members of the group.  So participants invariably do not know some or even many in the group.  There is a prohibition on Government attorneys being members.  Of course, members may from time to time become Government attorneys and have the prior discussions available to them, but that’s a rabbit trail I won’t go down right now.  Suffice it to say that there is the expectation that the discussions in the group are not available to the IRS or DOJ.

The clients' identities are not disclosed in the discussions. I have no way of knowing, but assume that the attorneys anonymize any facts that are disclosed in order to set up and move the discussion forward.  For purposes of this discussion, let’s assume that the facts are so anonymized.

The issue I present is whether the discussions that, from each participating attorney’s perspective disclose anonymized facts and seek only legal discussion, thereby constitute a waiver of the work product privilege.  Yesterday, there was a discussion on an attorney mail group regarding whether the discussions in emails to the group constituted a waiver of the work-product privilege.

The issue is whether the IRS or DOJ could in a tax investigation (including grand jury investigation) or tax litigation discover the group email discussions on the basis of waiver of the work product privilege and thereby prejudice the client (taxpayer).  For example, the first interrogatory and/or request for production in tax litigation from the Government would be to identify all discussions by the attorney relating to the client’s facts and produce all documents relating to those discussions.  Similarly, the Government could use its investigative compulsory process to demand access to the discussions and documents related to the discussions.

I had never thought about the issue before (that I can recall).  In a more general sense, I had never thought that discussing anonymized facts with fellow practitioners was a waiver of the work product privilege as to the anonymized facts and the legal and practice discussions that the anonymized facts generate.  The settings presenting the issues can be myriad, including a lunch with a fellow practitioner, a small discussion group of practitioners (many larger cities have such groups), or larger groups (such as at CLE events or, in the present case, an email discussion group).  (I should note that perhaps, if the “waiver” were viable in this context, it might also apply to Government attorney discussions with fellow Government attorneys who are not involved in the particular litigation.)

Having now thought about the issue and done some poking around on the issue, I am just going to offer some non-definitive thoughts on the issue.

I first offer the generic discussion from the current working draft of my Federal Tax Procedure Book (for publication in August 2020) (footnotes omitted, but those wanting footnotes can get the pdf with footnotes here):

f. Work Product Doctrine.